1. Debt Ratios: Introduction
  2. Debt Ratios: Overview Of Debt
  3. Debt Ratios: The Debt Ratio
  4. Debt Ratios: Debt-Equity Ratio
  5. Debt Ratios: Capitalization Ratio
  6. Debt Ratios: Interest Coverage Ratio
  7. Debt Ratios: Cash Flow To Debt Ratio

In the business world, debt is the amount that a business owes creditors. The most common forms of corporate debt are loans from banks and other lenders, as well as corporate or government bonds.

Debt is part of the liability section of a corporate balance sheet. Creditors have a claim on the company’s debt. Liabilities are obligations of the company, so failure to make good on these obligations could result in bankruptcy.

There are two types of liabilities — operational and debt. Operational includes balance sheet accounts, such as accounts payable, accrued expenses, taxes payable, pension obligations, etc. The latter includes notes payable and other short-term borrowings, the current portion of long-term borrowings, and long-term borrowings. In most investment literature, "debt" is used synonymously with total liabilities. In other instances, it only refers to a company's actual indebtedness.

The debt ratios that are explained in the following sections are those that are most commonly used. However, what companies, financial analysts and investment research services use as components to calculate these ratios is far from standardized.

Investors may want to look to the middle ground when deciding what to include in a company's debt position. With the exception of unfunded pension liabilities, a company's non-current operational liabilities represent obligations that will be around, at one level or another, forever—or at least until the company ceases to be a going concern and is liquidated.

Also, unlike external debt, there are no fixed payments or interest expenses associated with non-current operational liabilities. In other words, it is more meaningful for investors to view a company's indebtedness and obligations through the company as a going concern, and therefore, to use the moderate approach to defining debt in their leverage calculations.


Debt Ratios: The Debt Ratio
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